Dovish Yellen slaps down the hawks

For all last week’s hawkish rhetoric from several Fed policymakers, last night’s comments from Fed chair Janet Yellen were anything but, as she reiterated the need for the Federal Reserve to “proceed cautiously” on lifting interest rates.

All the recent talk about the potential for a rate rise in April appears to have been put to bed last night as Yellen indicated concern about the prospect of undershooting the central banks inflation target, as well as concern that further downward pressure on prices could well come from the difficulties being experienced by Chinese authorities in managing their economic slwodown.

Her dovishness contrasts with recent commentary from Fed officials John Williams of the San Francisco Fed and Dennis Lockhart of the Atlanta Fed arguing that an April move might well be warranted, on the basis of a tightening labour market acting as a valve to push prices higher.

While this week’s personal spending and PCE inflation data show scant evidence of that, it is becoming quite apparent that the Fed is clearly split on the timing of when to raise rates.

It is also apparent given the purpose behind Yellen’s remarks last night that she is determined to act when she feels it is prudent to do so, and that the claws of the hawks look likely to be blunted by the doves who appear to predominate on the voting committee.

Market reaction was fairly predictable with the US dollar dropping back sharply, and US equities closing at their best levels this year, as sentiment returned to the levels seen in the wake of the Fed announcement two weeks ago.

Amongst the main arguments for hiking has been the strength of the labour market with this week’s jobs data set to remain important. Today’s ADP employment report could well give a taster ahead of Friday’s official number, with expectations of 195k new jobs for March.

As a result of last night’s dovish commentary European markets look set to open higher this morning, however one should also be cognisant of the fact that while US markets have regained all their losses for 2016, it has been much harder for Europe’s markets to follow suit. As it is the Asia markets have been mixed with the Nikkei sliding after the latest industrial production figures for Japan posted another poor performance falling 6.2%, the biggest fall since the Fukushima disaster in 2011, as Japanese PM Abe’s third arrow continues to miss its mark.

The recent rebound in commodity prices does appear to be running out of steam, and a late slide in oil prices appeared to reflect that, as Kuwait announced that it would be resuming production at an oil field shut down in late 2014, after reaching an agreement to do so with Saudi Arabia. A higher euro could also limit the gains on a rebound in the DAX.

EURUSD – despite six successive down days after peaking below the February highs at 1.1380, the euro has been unable to get near to, or below the 200 day MA at 1.1050, which suggests we remain susceptible to another move highs. Only a move below 1.1030 argues for a move towards 1.0800.

GBPUSD – the pound appears to be forming a potential inverse head and shoulders reversal with neckline resistance at 1.4420, after finding support at 1.4060 last week. A move through could well target 1.5000. A move below 1.4050 argues for a move towards the recent lows at 1.3835.

EURGBP – the inability to break conclusively above the 200 week MA at 0.7935, has seen the euro slide back, which keeps the bias towards the downside. A weekly close above 0.7935 suggests a move towards 0.8100, while a failure argues for a drift back down towards 0.7820.

USDJPY – the US dollar continues to edge higher but the bias for a move lower remains intact while below the 114.80 area.

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